Sunday’s 60-minutes segment on fraudulent doc “recreation” has again raised concerns over potential further clogging up the foreclosure pipeline. I’m curious to get the opinions and feedback of forum followers about how this might impact the housing market over the next 12 months.
Sidebar: Agency Sales and Posting’s (ASAP performs many of the trustee sales) parent company LPS took a big hit in the 60 minutes piece … Up until 2009 LPS owned “Docs.”
FWIW… My two cents …
As FDIC Chairman Shelia Bair suggests, there may be a “clean up” fund in the works … in the “billions.” Homeowners would (could) accept the banks payola and in exchange would waive their right to sue. The banks insist that they ultimately could prove who owned the deed (those bundled in securitized CDOs) but the time and expense to establish this proof would be crushing … hence it’s likely easier for the banks to payoff those homeowners whose loans were wrapped up in CDOs without the proper deed transfers and wet signatures (most done via MERS). I suspect this will be a bigger problem for banks in judicial foreclosure states, as judges must be livid now that they’ve seen just how pervasive the magical recreation (*cough* fraud) of documents has been. The banks have excused the robo-signing as being the irresponsible acts of contracted servicing partners (such as “Docs” [formerly LPS-owned] in the 60-minutes segment) … but IMHO the banks are going to lose this “but it wasn’t us” argument, and hence I suspect a very large settlement fund will soon have to be set up.
Since March 31 the banking industry has been sequestered in private meetings at the Department of Justice in Washington DC. The bankers are in the room with FDIC, banking regulators, and many states attorneys general … the regulators are pushing the banks hard to set up a “relief fund” for those victims of robo-siging fraud. Question is how much “relief” $$$ is necessary … and will the largess be expanded to “others?” (not just to those with missing docs due to sloppy securitization). For now …nobody’s talking. I’d love to be a fly on the fall in that DOJ meeting room.
Great topic, thanks for starting. A few thoughts:
1)I always love when AG’s, Regulators, and Politicians talk about billions like it is a big number with regard to this crisis. You could pass out $100 Billion tomorrow and it wouldn’t solve the problem. I estimate we ran up nearly $4 Trillion (4,000 billion) in excess mortgage debt during the bubble. Much of which still remains on the backs of underwater homeowners.
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With Washington continuing to hire bankers into key regulatory positions, and with bankers being a primary source of campaign funds to politicians, I’d bet the underlying theme of those settlement talks is how to get the banks off the hook, without putting them at risk, and while sounding good to voters. In other words the whole thing is a sales job to help save the banks from the costs of frivolous law suits - while making sure the politicians can “claim” they are helping.
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While “frivolous” is probably a little too harsh, this whole documentation debate too often forgets that in nearly all cases the borrower a) did borrow the money, and b) isn’t paying it back. I think we will ultimately see banks win and that borrowers are throwing good money after bad mounting these fights. Despite the fact that I believe homeowners will ultimately lose the fight, I’m quite happy to see banks being held somewhat accountable and at least being forced to clean up their act. Even that is a fine line though - my guess is that we will end up paying for that clean up effort anyway - either through bailouts or higher fees. Instead of debating the end of Fannie and Freddie we should be debating the end of too big too fail and breaking these banks up – and their political clout with it.
Sean … I very much agree with your points above. Scary when you contemplate how big the bubble was pumped-up before the giant hissing (deflating) sounds became audible in 2007/8. We?re now 5 years into the deflating bubble and I?m not sure how much more air needs to come out of housing? As we can observe via Foreclosure Radar, shadow inventories remain quite large.
Like a fully loaded supertanker, housing is unwieldy and despite a few positive trends (e.g. good corporate earnings, slight recent improvement in unemployment numbers), the market cannot turn around on a dime. Plus there are icebergs that can further damage the supertanker’s hull … such as government-sponsored entities (GSEs) stepping back from being the dominant provider of mortgage funding.
Banks may take up some of the lending slack, but likely at higher interest rates. The Fed may have to raise rates … Bernanke knows he can only ignore the winds of inflation for so long before throwing is reputation on a funeral pyre. When the Fed moves to raise rates, that iceberg will impact housing.
Another scary thought ? 90% of mortgage loans made (still today) are “government backed” and lending effectively remains a State run industry. That makes me uneasy, to say the least, as the U.S. Taxpayer bailout of Fannie/Freddie has already reached $130 billion, a number that exceeds the bailouts of AIG, GM, Citigroup & Goldman Sachs combined. Moreover, were only getting started ? IMHO that 130 billion figure will double over the next several years.
Fannie/Freddie used and abused their implicit govt. guarantee (a self-full-filling prophecy ? implicit became explicit) to proliferate securitization of mortgage loans, and private fortunes were made by Fannie/Freddie executives. ?We help regular people achieve the dream of homeownership? was their mantra. Sadly, for many that dream has morphed into a nightmare.
What irks me is lack of accountability ? Virtually zero banking execs (and you can toss in a few politicians) have been held responsible for the mess they?ve helped create. Yet, I recently read that several pawns in the game (those who took ?liars loans?) have now been prosecuted and gone to jail. Not that many who took the via loan app falsification don?t deserve punishment (they do), but geez ? what about those most responsible for creating the melt-down? Instead of jail, the Kings and Queens in corporate suites were rewarded with seven figure bonuses (no claw back) and Angelo Mozilio is still out there working on his tan.
The fact is that many senior Wall Street/banking execs knew what was ?going down? well before the 2008 crash. Private audits conducted by banks in 2007/8 showed that a large % of the loans bundled up and securitized were a putrid mess, and questioned how rating agencies performed their magical alchemy to bestow the majority of these CDOs with a triple-A (?AAA?) ratings. The recently released (2011) Financial Crisis Inquiry Commission (FCIC) Report provides a stinging indictment of the Sergeant Shultz (?I know nothing?) execs. Quoting FCIC Chairman Phil Angelides:
?The extent to which lending institutions created, bought, sold securitized (packaged and repackaged) loans that they knew to be defective (is shocking)? and they spread them across the marketplace like an infection ? we found that a firm called Clayton Holdings, on behalf of most of the big banks ? UBS, Goldman, Citigroup, Deutsche Bank? would review the loans that were coming in from New Century or Ameriquest or other sub-prime lenders ? they were reviewing these loans ? they were finding out that 28% of these loans, on average, weren?t even meeting the lousy lending standards in 2006/7 ?. Despite that, they accepted 39% of the loans to package and they never disclosed this to investors ? Fannie Mae and Freddie Mac found $35 billion in loans that they were sold that did not meet the standards that were warranted and represented at the time by the lenders. We have information that Citigroup, from a guy named Richard Bowen, (who oversaw $90 billion in lending at Citigroup) that 60% of the loans Citigroup was buying and re-selling were deficient and didn?t meet underwriting standards ? it was an epidemic of defective lending and these big institutions knew the risk and they didn?t disclose them to investors and that?s pretty serious business.?
Most banking execs turned a blind eye as the personal risk/reward calculus was too much weighted towards ?don?t stop the gravy train? ? i.e. > profits were too substantial to stop the madness.
FWIW (in case anyone wants to read more rambling rants), I wrote an article on the financial crisis underpinnings back in 2008 > http://iphonasia.com/?p=2664
Today (4/13/2011) the OCC and OTS hit 14 major lenders and various service providers with a mandate to reimburse homeowners who were “robo-signed” in foreclosures > http://bit.ly/iaXl5V
What’s missing are the details re the amount of the reimbursement. I also wonder if this is just the first shoe to drop. I did not see any states atty gens that were part of this deal. I expect we will eventually see a large industry “disaster relief” fund created for payoffs to robo-signed (now ex) homeowners. Not sayin’ these homeowners should walk away with their pockets stuffed with cash. Many were way underwater and have already walked away w ample $$ (having used their homes as ATMs). But there were also plenty of homeowners who got blindsided by the meltdown, then lost a job and when all was said an done, they lost their healthy (20% in some cases) downpayment + all equity in their house. Every case is different. Some ex-homeowners deserve sympathy, others deserve prosecution … But the banks too were guilty of aiding and abetting the crisis, and they were later (post bubble burst) just plain crazy to allow/encourage their “service partners” to go nuts with fraudulent doc recreation (a.k.a. robo-signing).
The banks that were mandated by the OCC/OTS to pay include:
Citibank, Bank of America, JPMorgan Chase and Wells Fargo, Ally Financial Inc., Aurora Bank, EverBank, HSBC, MetLife Bank, OneWest Bank, PNC, Sovereign Bank, SunTrust Banks, U.S. Bank
The service partners named include:
Lender Processing Services (LPS) and MERSCORP (MERS)
After a bit more reading here what the OCC/OTS are requiring at this point …
* The identified financial firms must hire auditors to determine how many homeowners could have avoided foreclosure in 2009 and 2010.
* (quoting from AP) "The Fed said it believed financial penalties were ‘appropriate’ and that it planned to levy fines in the future. All three regulators said they would review the foreclosure audits. Under the agreements reached, the lenders and servicers have 45 days to hire an auditor and will ‘remediate all financial injury to borrowers caused by any errors, misrepresentations, or other deficiencies.’
All of this is probably true and more. The evolution of the 4th amendment right to due process has gotten way out of context to what the founders had envisioned. As Sean pointed out, the record is clear that the borrowers defaulted on their obligations. I have met many borrowers who were ranting about how the bank had no right to foreclose. After listening to them and many times agreeing with them that the banks are crooks, I ask them if the bank misplaced their payment? So far, they all say no.
This is very convienient for the banks and Obama. If we run out of victims and the banks foreclose at the rate they could, the collapse of the housing market would soon be followed by a depression. So, as an auction buyer, I expect I will be part of the clean up crew for several more years.
My error, it is the 14th amendment, not the 4th.
I think that is exactly right Richard. All these delays and settlements only help push off the real problems to another day. Not a bad deal for auction investors… should mean a slow but steady supply for years to come.
I love the “remediate all financial injury to borrowers caused by any errors, misrepresentations, or other deficiencies” quote. One judge already found that even though the bank made an error, there was no real loss to the homeowner since they weren’t making their payments. I can’t recall the case to cite it, but I wonder if perhaps that is where that statement is headed… “yes, we did make an error, but there was no financial injury since you weren’t making your payments”. Would be a tidy way to sweep it under a rug.
No question in my mind that the volume trustee sales will be in large supply for years to come. I just hope the regulators’ remediations can be implemented swiftly. I also hope the states attorneys general (AGs) can quickly get together on their plan to “draw blood” from the banks. No doubt they will soon enough be standing before podiums to have their Elliot Spitzer moment.
The new OCC/OTS action also requires that banks put an end to “dual tracking” (loan mod in the works and concurrently a foreclosure is in process).
California Legislature just shot down the proposed bill (CA SB 729) that would have ended “dual tracking” in the state … but I suppose if you’re one of the lucky lending institutions under the OCC/OTS consent decree, then you’d have to end dual tracking regardless.